Four Reasons to Consider a “strategic Divorce”
Sometimes it may seem that everything about relationships these days is alternative and unexpected, but in one sense people remain quite traditional: we still tend to get married when we love each other. Millions of people get married in the United States every year, and each of these partnerships is an example of optimism. After all, marriage is not just an emotional commitment, it is also a financial and social partnership.
This is why we consider divorce a failure, despite the fact that this is how 41% of first marriages end. Divorce not only means that you have lost the feeling of love for your partner, it means that your entire life will have to be rebuilt, often to your detriment. This is especially true when it comes to money, since divorce can have an incredibly negative impact on your finances .
But not always – in fact, divorce can sometimes have a positive impact on your finances, and it’s not uncommon for people to get a “strategic divorce” to reap those benefits. It’s not something everyone should think about, but under certain circumstances, the best thing you and your partner can do financially is get a divorce on paper while staying together in real life.
Here are four scenarios when a strategic divorce might make sense.
To reduce your tax bill
Some married partners are surprised to find that their tax bills increase after marriage. This is called the ” marriage penalty ” and it can make marriage much more expensive than you expected. This isn’t the case for every married couple, but under certain circumstances you could be faced with a daunting tax bill—for example, if your combined income exceeds the Earned Income Tax Credit limit or pushes both of you into a higher tax bracket.
If your marriage has significantly increased your tax bill, a strategic divorce may make sense : You can continue to live your life as a committed couple while enjoying a lower tax bill because you’re filing separately as single people. If your tax bill has been shocking since you got married and you think the savings may pay for the hassle of divorce, you should first talk to an accountant or tax professional to make sure you understand the complexities and are confident. what your math turns out to be.
To qualify for benefits
Anyone who has ever relied on government benefits for their survival knows, maintaining your qualifications can be maddening. A significant barrier for many people is income: if you earn even slightly more than the maximum, you could fall off the ” benefit cliff ” and lose the extra income you count on, even if your new income doesn’t actually cover your income. needs.
For some couples, their combined income may exclude them from a wide range of programs, from federal student aid to Medicaid. For example, if one spouse needs to enter a nursing home, they may not qualify for Medicaid because your combined income is too high. A ” strategic divorce ” may reduce their individual income to the level at which they can receive benefits, or it may reduce the custodial parent’s income to the level at which their children will be able to receive federal assistance.
To pay medical bills
If you’re dealing with a wave of medical bills caused by a chronic illness, a serious accident, or a sudden change in your or your partner’s health, you may need to try what’s called a ” medical divorce .” afford the necessary care. It’s a simple concept: community assets of the marriage are transferred to the healthy spouse, and when the divorce is finalized, the new “single” partner can claim higher benefits . At the same time, assets (home, retirement accounts, etc.) are protected from being used to cover needed care.
When should you borrow from an IRA?
If you have retirement accounts, you know that the money you put into it is tax-free, meaning it isn’t taxed until you withdraw it. But withdrawing funds before retirement age incurs early withdrawal penalties on top of taxes—in most cases, about 10% of the withdrawal amount. This can be a significant bill to pay, especially if you withdraw money early due to serious difficulties where every penny counts.
As a last resort, a strategic divorce can spare you this penalty: The divorcing couple can include something called a domestic relations order (QDRO) in their agreement. A QDRO divides retirement assets, and withdrawals made under a QDRO are exempt from early withdrawal penalties . If you desperately need to get money out of your retirement accounts without losing 10%, a carefully planned strategic divorce could allow you to do just that.